Report: Lack of controls led to Somersworth Housing Authority thefts

Saturday

Nov 10, 2012 at 3:15 AM

By Oliver Jenkinsojenkins@fosters.com

SOMERSWORTH — An independent auditor’s report concluded a number of preventive controls were missing within the Somersworth Housing Authority over a six-year span — a period during which more than $700,000 was stolen by the organization’s former fiscal director, Lisa Reid.

On Dec. 6, 2011, Reid reportedly admitted to SHA director Beth Salinger that she had stolen the funds amid personal financial troubles. Somersworth police approached Reid later that same day, but she requested a lawyer, effectively shutting down communication with law enforcement.

Reid was found dead the next morning from an apparent suicide by drug overdose.

The auditor’s report — completed by the firm Hurley, O’Neill & Company of Quincy, Mass. — ultimately cites a lack of internal controls that could have prevented the loss of approximately $780,000 at the hands of the SHA’s former fiscal director.

“Management and the Board of Commissioners have not operated a control environment conducive to the prevention and detection of fraud and illegal acts as evidenced by fraud perpetrated by a former employee, which resulted in the theft of over $780 thousand from the Authority over a period of more than six years,” the report reads.

And the report, which was conducted through Dec. 31, 2011, outlines a number of factors that enabled Reid to commit — and conceal — the fraudulent acts.

First, the report states Reid processed checks written to herself on the check stock of certain checking accounts of the authority. It also says Reid endorsed the checks by scanning signatures from other legitimate checks and then printing them on the checks generated from her personal computer.

Additionally, Reid recorded the transactions in the general ledger by netting her thefts against proceeds from third parties for management fees earned by the authority. For example, if the SHA earned $20,000 in a month for management fees and Reid stole $8,000, she would subsequently record management fee revenue of $12,000.

Reid further concealed her criminal acts when she prepared the annual budgets. The report states it appears the former fiscal director intentionally underestimated the revenue to be earned from management fees which would ultimately appear consistent with the actual results that had been underreported by the amount of her fraud. For the year that ended on Dec. 31, 2011, the SHA budgeted management fee revenue of $260,000. However, the actual management fee revenue — exclusive of effects of fraud — was actually $360,000.

“The employee relied on the failures of management and the Board of Commissioners to implement effective controls,” the report reads. “Proper segregation of duties in various controls activities would have reduced or eliminated the opportunity to commit fraud and basic monitoring procedures would have detected it.”

Hurley, O’Neill & Company conclude Reid took advantage of an opportunity to commit fraud created by a “lax control environment, a lack of effective monitoring and control activities, and an absence of segregation of duties.” Specifically, the report says five factors directly contributed to Reid’s ability to commit fraud undetected.

One was management’s failure to perform an adequate risk assessment — an action which would have evaluated where the SHA was susceptible to acts of fraud.

A second factor was that management did not properly safeguard assets. Reid had unmonitored custody of the SHA’s cash assets. “The employee had access to the check stock and signature stamps which enabled her to bypass the authorization function — approving cash disbursements and signing checks,” the report state. “Bank statements and canceled checks were received directly by the employee and were never reviewed by management.”

Reid also had unmonitored control of the general ledger and recorded all transactions necessary to disguise her fraud. She also performed bank reconciliations of the accounts from which she stole funds. But these bank reconciliations were never reviewed by management and gaps in the check sequences went undiscovered or uninvestigated by management.

Lastly, Reid prepared the annual budgets without being monitored by management — a component that allowed her to manipulate the budgets in order to hide her fraud.

In conclusion, the auditor’s report recommends SHA management assess the critical components of internal control and consider implementing a comprehensive internal control policy. “Segregation of duties should be analyzed to ensure that the basic functions of control are separated, with those functions generally being; authorization, recording, custody of assets, and reconciliation or audit,” the report concludes. “The Authority should also consider implementing comprehensive fraud policy to establish how dishonest activity will be handled, including terminating employment and reporting the matter to law enforcement authorities.”

In their response, SHA management agreed weak internal controls gave way to an opportunity for fraudulent behavior to take place. Management has since taken corrective action to improve fiscal controls and awareness of the control environment.

Seeking to recoup its losses, SHA filed suit in January against Reid’s husband, Scott Reid, who now controls his late wife’s assets. SHA is asking a superior court judge to put a temporary freeze on those assets, which include property, vehicles, and income from the couple’s furniture store in Rochester.

Emails furnished by Reid’s husband during the court battle have tipped investigators off to the existence of at least two online trading accounts Lisa Reid operated before her death, according to court documents.

The housing authority is anticipating that it may need a court order to determine if the accounts are still active, and whether they contain funds. Scott Reid has indicated he will cooperate with the housing authority in the investigation, according to court documents.

Scott Reid and his attorney were scheduled to appear in court on Sept. 20 for a hearing regarding the fate of Reid’s assets. The hearing was continued until Jan. 4, 2013, at the request of the housing authority, which cited the discovery of the online trading accounts as the cause. SHA will seek to lump together any money in the accounts with Lisa Reid’s other assets.

Earlier this year, a superior court judge denied a request by the housing authority to grant a temporary restraining order against Lisa Reid’s assets without holding a hearing on the matter. The order would keep Scott Reid from selling or giving away any of his late wife’s assets.

In March, the housing authority and Scott Reid came to an agreement to put off further legal action for 90 days. The agreement was meant to allow attorneys to determine the ownership of all assets once owned by Lisa Reid.

In the interim, Scott Reid voluntarily agreed to provide at least 10 days notice to an attorney representing the housing authority before transferring any asset of his late wife’s worth more than $1,000. He also agreed to place all income from the couple’s furniture store, Cozy Home Primitives, into a trust fund.

The housing authority, through its attorney, contends several assets now under Scott Reid’s control were potentially purchased with funds stolen from the SHA. Those assets include time shares and/or condominiums in Florida, a Jeep, a recreational vehicle and the money used to lease space for the couple’s furniture store.